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Oil and the American Way of Life: Don ’ t Ask, Don ’ t Tell. Robert K. Kaufmann Boston University August 4, 2011. http://www.bu.edu/cees/people/faculty/kaufmann/index.html. 10 Billion Barrrels. Basic Facts of the Oil Market 2008. World oil demand 85.5 million barrels per day

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Oil and the american way of life don t ask don t tell

Oil and the American Way of Life:Don’t Ask, Don’t Tell

Robert K. Kaufmann

Boston University

August 4, 2011

http://www.bu.edu/cees/people/faculty/kaufmann/index.html


Oil and the american way of life don t ask don t tell

10 Billion Barrrels

Basic Facts of the Oil Market 2008

World oil demand 85.5 million barrels per day

OPEC produced 44 percent of the world market

US consumed 20.6 million barrels per day

US imported 57 percent of its consumption


Oil and the american way of life don t ask don t tell

One Big World Oil Market?


Oil and the american way of life don t ask don t tell

Reducing US Dependence on Imported Oil is a “Good Thing”


Oil and the american way of life don t ask don t tell

The Costs of Increasing US Production

0.08

0.07

0.06

0.05

Fraction

0.04

0.03

0.02

0.01

0

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

Kaufmann, R.K. and C.J. Cleveland. 1991. Policies to increase US oil production: Likely to fail, damage the economy, and damage the environment. Annual Review of Energy and the Environment16:379-400.


Oil and the american way of life don t ask don t tell

A Competitive Market

Prices Oil Efficiently


Oil and the american way of life don t ask don t tell

Annual Change in Real Oil Prices

80

Competitive Market

OPEC

60

Texas Railroad

Commission

40

20

0

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

-20

-40

-60

Kaufmann, R.K. 1995. A model of the world oil market for Project LINK Economic Modelling 12:165-178


Oil and the american way of life don t ask don t tell

OPEC Control

1

0.9

0.8

0.7

0.6

0.5

Fraction

0.4

0.3

0.2

0.1

0

1938

1943

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003


Oil and the american way of life don t ask don t tell

The Impact of Higher Oil Prices


Oil and the american way of life don t ask don t tell

We Spend More Money on Energy…

10

9

8

Percentage

7

6

5

4

1959-I

1964-I

1969-I

1974-I

1979-I

1984-I

1989-I

1994-I

1999-I

2004-I


Oil and the american way of life don t ask don t tell

And Less on Other Goods and Services


Oil and the american way of life don t ask don t tell

Household Energy Expenditures & Mortgage Delinquency


Oil and the american way of life don t ask don t tell

Prices: Speculation or Fundamentals?


Oil and the american way of life don t ask don t tell

Market Fundamentals


Oil and the american way of life don t ask don t tell

OPEC Capacity Utilization


Oil and the american way of life don t ask don t tell

The Determinants of World Oil Prices

OPEC Capacity Utilization OPEC production divided by OPEC Capacity

OECD Stocks Days of forward consumption

Refinery Utilization Percentage

Futures Market Contango vs Backwardation

Temporary Disruptions: Hurricane Season

Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4):2609-2622.


Oil and the american way of life don t ask don t tell

Changes in Market Fundamentals?

Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4):2609-2622.


Oil and the american way of life don t ask don t tell

US Oil Inventories


Oil and the american way of life don t ask don t tell

Price Discovery

WTI_Far_MonthBrent_Far_Month

WTI_Near_Month Brent_Near_Month

Dubai_Near_Month

WTI_SpotBrent_Spot

Bonny_Spot

Maya_MonthDubai_Spot

Kaufmann, RK. And B. Ullman, 2009, Oil prices, speculation, and fundamentals, interpreting causal relations among spot and futures prices, Energy Economics. 31:550-558.


Oil and the american way of life don t ask don t tell

The Dubai-WTI Far Month Spread


Oil and the american way of life don t ask don t tell

The Role of Traders


Oil and the american way of life don t ask don t tell

Speculative Effects?


Oil and the american way of life don t ask don t tell

Speculative Bubble?


Oil and the american way of life don t ask don t tell

Is the World Running Out of Oil?


Oil and the american way of life don t ask don t tell

2.5 trillion barrels

This Will Never Happen….But

180

160

140

120

Million barrels per Day

100

80

1 trillion barrels

60

40

20

0

1900

1920

1940

1960

1980

2000

2020

2040


Oil and the american way of life don t ask don t tell

Hubbert’s Forecast for a Global Peak

120

100

80

Million barrels per Day

60

40

20

0

1899

1919

1939

1959

1979

1999

2019

2039

2059

2079

2099


When will global production peak

2032 2.9 trillion

2026 2 trillion

2021 1.5 trillion

2014 0.8 trillion

When Will Global Production Peak?

180

160

140

120

100

80

60

40

20

0

1900

1920

1940

1960

1980

2000

2020

2040

2060

2080

2100

Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, Ecological Economics.67:405-411.


Oil and the american way of life don t ask don t tell

Growth and Decline Rates

160

2023

140

120

2017

2036

100

Million Barrels per Day

2025

80

60

40

20

0

1900

1925

1950

1975

2000

2025

2050

2075

2100

Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, Ecological Economics.67:405-411.


Oil and the american way of life don t ask don t tell

The Need for Alternatives

50

45

0.8 trillion

40

35

30

Millions of Barrels of Oil Per Day

25

2.9 trillion

20

15

Current Production by Saudi Arabia

10

5

0

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Years after the Peak

Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, Ecological Economics.67:405-411.


Oil and the american way of life don t ask don t tell

Do Gasoline Prices Rise

Faster Than They Fall?


Oil and the american way of life don t ask don t tell

Do Gasoline Prices Rise

Faster Than They Fall?


Oil and the american way of life don t ask don t tell

Rising Crude Oil & Motor Gasoline Prices

55

50

45

40

35

30

25

20

15

10

1

6

11

16

21

26

31


Oil and the american way of life don t ask don t tell

Falling Crude Oil & Motor Gasoline Prices

60

50

40

30

20

10

0

1

6

11

16

21

26

31


Oil and the american way of life don t ask don t tell

Yes…But

Gasoline price rise faster than they fall in: Texas, Michigan, Pennsylvania, Florida, Illinois, Minnesota, Ohio, Louisiana, Idaho

Effect caused by stocks and refinery utilization

As demand declines, producers slow refining and sell from stocks, which slows the price drop

As demand rises, refinery capacity limits supply response

Kaufmann, R.K and C Laskowski, 2004, Causes for an asymmetric relation between the price of crude oil and refined petroleum products, Energy Policy


Oil and the american way of life don t ask don t tell

Demand is Forecast to Rise

140

120

100

80

Global

60

OECD

40

20

Non-OECD

0

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030


Oil and the american way of life don t ask don t tell

Changes in OECD Demand

0.5

1985 - 1978

0

Industry

Transport

Refineries

Electricity

Residential

Agriculture

Non-energy

Commercial

-0.5

-1

90

Million barrels per day

80

-1.5

70

60

Million Barrels per Day

-2

50

40

-2.5

30

20

-3

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005


Oil and the american way of life don t ask don t tell

Squeeze Blood From a Stone?

1973

2004


Oil and the american way of life don t ask don t tell

Hubbert’s Prediction

10

9

8

7

6

Million Barrels per Day

5

4

3

2

1

0

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000


Oil and the american way of life don t ask don t tell

Hybrid Model

Million Barrels per Day

After: Kaufmann (1991)


Oil and the american way of life don t ask don t tell

Geological Maturity Outside OPEC

12

Lower 48 States

10

8

Million barrels per day

6

4

North Sea

2

0

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005


Oil and the american way of life don t ask don t tell

Will Opening ANWR Or Large Discoveries Solve US Supply Constraints?


Oil and the american way of life don t ask don t tell

USGS Projections For ANWR

United States Geological Survey, 1999. The oil and gas resource potential of the Arctic National Wildlife Refuge 1002 Area, Alaska, Open File Report 98-34.


Oil and the american way of life don t ask don t tell

The Story Behind the Headlines


Oil and the american way of life don t ask don t tell

Remaining Supplies of Oil

Figure From The End of Cheap Oil National Geographic 2004


Oil and the american way of life don t ask don t tell

Will OPEC Increase Production to Facilitate Demand?

60

55

50

45

40

Million barrels per day

35

30

25

20

15

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030


Oil and the american way of life don t ask don t tell

Should OPEC Increase Capacity?

3.5

70

3.0

60

2.5

50

Change in OPEC Production

2.0

40

1.5

30

Percentage

Percentage

1.0

20

0.5

10

0.0

0

Change in price

-0.5

-10

-1.0

-20

0

1

2

3

4

5

6

7

8

9

10

11

12

Source: Dees, S, P. Karadeloglou,. R.K. Kaufmann, and M. Sanchez, 2007, Modeling the world oil market: assessment of a quarterly econometric model, Energy Policy


Oil and the american way of life don t ask don t tell

Before and After the Peak


Oil and the american way of life don t ask don t tell

Being On-Time Matters!


Oil and the american way of life don t ask don t tell

Environmental Regulations, Demand, and US Refinery Capacity

20000

17000

14000

Thousand Barrels per Day

11000

8000

5000

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004


Oil and the american way of life don t ask don t tell

Non-US Refinery Capacity & Demand

70

Refinery Capacity

60

50

Demand

40

30

20

10

0

1970

1975

1980

1985

1990

1995

2000


Oil and the american way of life don t ask don t tell

Bringing Energy Into the Classroom

  • Understanding energy

  • Touch measures of energy efficiency

  • A home energy audit

  • How much energy do I use directly


Oil and the american way of life don t ask don t tell

What is Energy?

Anything that has the ability to do work


Oil and the american way of life don t ask don t tell

Measuring Energy

CalorieThe heat required to raise the

temperature of one gram of water one

degree Celsius


Oil and the american way of life don t ask don t tell

Reading Food Labels

Ask students to bring in their favorite food


Oil and the american way of life don t ask don t tell

Human Body Temperature

‘Normal’ body temperature 37oC

Active Range 36oC - 38oC

Stability Range 34oC - 41oC

Critical thermal maximum 43oC

Critical thermal minimum 28oC


Oil and the american way of life don t ask don t tell

So Let’s Do a Simple Calculation

How much do you weigh? ________(kilograms)

What is normal room temperature? ____ (degrees Celsius)

What percentage of your body is water ______ (percentage 60M 55F)

How many calories are needed to maintain each gram of your body __?

How many calories do you need to eat ____?


Oil and the american way of life don t ask don t tell

Touch Measure of Energy Efficiency


Oil and the american way of life don t ask don t tell

Law of Conservation

Matter is neither created nor destroyed in a physical or chemical transformation


Oil and the american way of life don t ask don t tell

Second Law of Thermodynamics

In all energy conversion processes, energy loses its ability to do work and is degraded in quality


Oil and the american way of life don t ask don t tell

Energy In Equals Energy Out

Efficiency = Work out/Energy in

Energy In

Work out

Machine

Waste Energy (Heat)


Oil and the american way of life don t ask don t tell

Energy Flows in Light Bulbs

Efficiency = Work out/Energy in

Electricity In

Light

Light Bulb

Waste Energy (Heat)


Oil and the american way of life don t ask don t tell

Lightbulbs

Compact Flourescent

Halogen bulb

Incadescent bulb


Oil and the american way of life don t ask don t tell

Light Bulb Efficiency


Oil and the american way of life don t ask don t tell

What Kind of Bulb to Buy?

How much does the bulb cost?

How much does electricity cost?

How long does the bulb last?

How often is the bulb on?

What is the interest rate?


Oil and the american way of life don t ask don t tell

A Calculation?

dollars/megalumen-hour=( initial-dollars+watts-consumed*dollars-per-kilowatt-hour*thousand-hours-lifetime)

( average-lumens * thousand-hours-lifetime / 1000 )

60-watt incandescent bulb, 800 lumens, 1,000 hours lifetime, $1.00 initial cost:

( $1.00 + 60 * $0.10 * 1 ) / ( 800 * 1 / 1000 ) = ( $1.00 + $6.00 ) / 0.8 = $8.75 / megalumen-hour

15-watt CFL bulb, 800 lumens (680 average), 6,000 hours lifetime, $5.00 initial cost:

( $5.00 + 15 * $0.10 * 6 ) / ( 680 * 6 / 1000 ) = ( $5.00 + $9.00 ) / 4.08 = $3.43 / megalumen-hour


Oil and the american way of life don t ask don t tell

Home Energy Audit

  • How much energy do you use to move around?

  • How much energy do you use to heat your house ?

  • How much energy do you use to cool your house?


Oil and the american way of life don t ask don t tell

Energy Used to Move

Track how far you go each week by type of vehicle


Oil and the american way of life don t ask don t tell

Home Energy Audit

Obtain Information

- Electric Company (monthly bills)

- Gas Company (monthly bills)

- Oil Company (monthly bills)

- Weather Data (daily temperature)

- Size of home (square meters)


Oil and the american way of life don t ask don t tell

Weather Data

Heating Degree Days = 65oF – Outside Temperature

Cooling Degree Days = Outside Temperature – 65oF


Oil and the american way of life don t ask don t tell

Measuring Energy Use

Slope = Energy Use

HDD

Energy Use per Month

Heating Degree Days or Cooling Degree Days per Month


Oil and the american way of life don t ask don t tell

Comparisons


Oil and the american way of life don t ask don t tell

Oil Prices & Exchange Rates

Chicken vs Egg

1.6

155

1.5

135

1.4

115

1.3

95

Dollars per Euro

Dollars per Barrel

1.2

75

1.1

55

1

35

0.9

0.8

15

2000:01:07

2002:01:04

2004:01:02

2005:12:30

2007:12:28


Oil and the american way of life don t ask don t tell

The Bubble Bursts….

21.5

21

2007

20.5

20

Million Barrels per Day

19.5

19

2008

18.5

18

Jan

Feb

May

April

June

July

March

August

October

December

November

September


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